A Roundabout Approach to Macroeconomics 2
Total Page：16
File Type：pdf, Size：1020Kb
A Roundabout Approach to Macroeconomics 2 another matter. Here, the time element is a debilitating problem: These expectations, if you can call them that, are baseless. The future is shrouded in an impenetrable fog of uncertainty, leaving the current level of investment spending to be determined by unruly psychological factors—Keynes’s infamous “animal spirits.” The resultant circular flow will gush and ebb and even on average may not entail enough flow to fully employ the labor force. The circular-flow framework, exercised in both its short-run and long-run modes, seems to me to be exactly the wrong framework for understanding and dealing with the A Roundabout Approach to Macroeconomics: time element in macroeconomics. Identifying the polar cases of “no problem” and Some Autobiographical Reflections* “debilitating problem” doesn’t get us any closer to a solution to all those intermediate cases lying between the poles. The tell-tale feature that inevitably characterizes this framework has been recognized in recent years by Robert Solow (1997)—namely the Roger W. Garrison** lack of any “real coupling” (Solow’s term) between the short run and the long run. In Solow’s reckoning, the two runs simply divide our discipline’s subject matter into (1) the problem of maintaining full employment of existing resources and (2) the I. Introduction: Setting the Stage determinants of economic growth. “Roundaboutness” is a concept featured in Austrian capital theory. Homely stories A viable alternative to the Keynesian circular flow framework is the Austrian about the bare-handed catching of fish are a prelude to a discussion of the economy’s means-ends framework. People employ means (investment) to achieve ends capital structure. The outputs of some stages of production become inputs to others. (consumption). In a capital-using economy, there is a significant time dimension Production takes time. The capital structure, broadly conceived, has a temporal separating means and ends. We realize that some production processes take more time profile—one that can be modified in response to changes in intertemporal consumption than others. And, thinking in macroeconomic terms, we recognize that production time preferences and resource constraints. This was the central message of Eugen von can increase or decrease for the economy as a whole as market conditions warrant. In Böhm-Bawerk (1959). the “medium run” (a term from Solow, 2000), the problem is one of adjusting Alfred Marshall, who theorized in terms of the short period and the long period, production decisions to (intertemporal) consumption preferences—a problem that Axel taught us that most problems in economics stem from the ever-critical time element. Leijonhufvud (1998) urges us to put back on our macroeconomic agenda. The only I think Marshall was right on time. But I also believe that a healthy understanding of solution available in a decentralized economy is one involving entrepreneurial some of those problems, particularly the ones in macroeconomics, is not best facilitated responses to changing market signals and especially to changes in the rate of interest. by his simple short-period/long-period distinction. The time element here (Böhm-Bawerk’s “roundaboutness” of production activities) is Adopting Marshallian methods, John Maynard Keynes dealt with the polar a key variable in the system. Like other endogenous variables, it is subject to marginal extremes in the quality of expectations, casting serious doubt about the viability of a adjustments in response to parametric changes. Of course, there is uncertainty. And the market system. In the short run, the time element itself is no problem: Short-run fog is more of a problem the farther into the future the entrepreneurs are trying to see. expectations faithfully reflect reality. If the level of spending changes, the multiplier But still, what seems to be called for is an application of marginalism and not a process plays itself out in a clockwork sequence of spending and earning, eventually contrasting of the polar cases. achieving a new circular-flow equilibrium. Long-run expectations, however, are At the very dawn of the Keynesian revolution, the circular-flow framework and the means-ends framework were seen as the two real live alternatives (Hicks, 1967). Marshall-cum-Keynes gets you one vision of the economy (plus a toolkit of policy * Forthcoming in The American Economist, vol. 47, no. 2 (Fall) 2004. Also in Michael Szenberg and options); Böhm-Bawerk-cum-Hayek gets you another vision of the economy. In the Lull Ramrattan, eds., Reflections of Eminent Economists, Brookfield, VT: Edward Elgar, 2004. early 1930s, Friedrich A. Hayek was brought to the London School of Economics by Lionel Robbins precisely for the purpose of providing a counter to the ideas of Keynes. **Roger W. Garrison is Professor of Economics at Auburn University in Alabama and author of Time But Hayekian ideas proved ineffective against the Keynesian avalanche. Debate and Money: The Macroeconomics of Capital Structure (Routledge, 2001). Some material for this essay is drawn from the Preface of Time and Money and from Garrison (1995a) and Garrison (2000). continues to this day about just why Hayek failed to review the General Theory 3 forthcoming in The American Economist A Roundabout Approach to Macroeconomics 4 (Caldwell, 1998) and just how he lost out to Keynes. capacitors, I was off to the supply room. It was a rude awakening—to say nothing of At mid century, Hayek’s business cycle theory, a theory that contained the seeds the embarrassment—to learn that a 30-farad capacitor would be about the size of a of a full-fledged capital-based macroeconomic framework, had sunk into oblivion. His boxcar! books, including Prices and Production, which was the print version of the lectures he When I eventually acknowledged the constraints imposed by reality and could had delivered at LSE in 1931, were long out of print. Undergraduates of my actually get the raw materials for a circuit, I had no trouble putting them all generation—even economics majors—would never hear about Hayek, much less learn together—but only if the other students would leave me alone. Which is to say that I that his theory was once the principal rival of Keynes’s. The index in Paul Samuelson’s was no good at team work. Unfortunately, we usually had six hands working on one Principles of Economics, 7th ed. (1967), which dominated the field at the time, refers circuit. That was an exercise in frustration for me. Things were no better in the the reader to a single footnote in an appendix on commodity and factor pricing—where heavy-machinery lab, where we had only three hands working on the circuit. As a Hayek is portrayed, in effect, as being on the losing side of the socialist-calculation not-too-subtle safety reminder, the lab instructor had left one pair of sneakers welded debate. to the floor—a result of an earlier student completing the circuit in an all-too-personal Prices and Production didn’t get back into print until 1967, when it was offered, way. Each of us had to work with one hand behind his back. And by the way, “behind along with other Hayek books, by Augustus M. Kelley as part of a reprint series. But her back” is a phrase that had little application at Rolla in the 1960s. The female in that year, I was a long way from reading Hayek and, in fact, a long way from population at the Missouri School of Mines could have been measured in picofarads. studying economics. The progression of my own studies from the sinusoidal rhythms Whether involving individual effort or team effort, the technical courses at MSM of alternating current to the cyclical fluctuations of a mixed economy was a roundabout were given precedence over other courses—few in number—that were outside the hard one—hence the double entendre of this essay’s title. sciences. I took a one-semester course in economics (both micro and macro) to fulfill the social-science requirement. I remember the Keynesian diagrammatics and II. Flashback: Electrical Engineering and Engineering Econ remember thinking that Samuelson’s rendition of the circular-flow, complete with In January of 1967 I was completing the course requirements for a BS in Electrical small drain spout that vented saving away from the investment pump, had something Engineering. Few students could finish the course work in four years at the Missouri of a comic-book character to it. Neither the diagram nor the text inspired careful study School of Mines and Metallurgy (now the University of Missouri at Rolla). Most took of Keynes, and there was no hint of a more appealing alternative. The lectures on five years. I was lucky to get through in four-and-a-half—especially in view of my unemployment and business cycles were no help. I remember only that the professor having completed the first two years at a junior college. Getting some early course ended almost every sentence with the words “as such.” And sometimes there were two work behind me at Joplin Junior College kept the cost of my education down. I could back-to-back “as suches”—one deliberate, one subconscious. live at home and cover the out-of-pocket expenses with income from part-time and The only other course that had any economics content at all was taught in the civil summer jobs. The junior college put me a little behind in terms of the applied engineering department. It was called Engineering Economics—with the Economics engineering courses, but it put me way ahead in terms of mathematical skills. Martha always pronounced with a long e and usually shortened to “Econ.” I look back at that McCormick was probably the best college-level professor of mathematics in the state.